Markets
Today’s economic center piece was US CPI. Inflation in December rose 0.5% m/m to be up 7% year-on-year. That’s up from 6.8% the month before and the highest since June 1982! The less volatile core gauge not only accelerated y/y, from 4.9% to a three-decade high of 5.5%. Monthly price dynamics also quickened, from 0.5% to 0.6% suggesting a sharp inflation cooldown isn’t materializing so far. Energy prices fell in December (-0.4% m/m) but was more than compensated by a broad increase in almost every other category: housing (0.4% m/m), transportation (0.8% m/m), household furnishings (1.3% m/m) and apparel (1.7% m/m) are some of the most important contributors. A rudimental split, showed services and goods inflation added 2.19 ppt and 2.16 ppt respectively to the headline figure. Energy (1.8 ppt) and food (0.89 ppt) make up for the remaining difference. The high inflation only strengthens the Fed’s case to double down on its normalization intentions. This recently gained traction in markets under the form of faster (March gets an almost 90% market probability) and more (four instead of the dot plot’s suggested three) rate hikes followed by a run-off of the balance sheet shortly after rate lift-off. It also means quite some of the Fed’s expected path has been discounted by now and that may explain some of the buy-the-rumour, sell-the-fact market reaction. The US yield curve flattens. Short tenors already retreated from intraday highs in the run-up to the CPI release. Yields are up 0.6 bps (2) currently. Medium (5y) to longer maturities (10y) lose 1.2 to 2 bps. Technicals play a role here as well, with the 10y yield for example having lost momentum earlier this week after failing to break above 1.77% resistance on a sustained basis. The German bond market suffers from collateral damage on the US’. Yields were already downwardly oriented and that move accelerated in lockstep with US Treasuries’ gaining traction. In particular for the 10y yield (-4.8 bps) there were some technical elements at play too with the psychological 0% coming within striking distance but proving a (mental) step too far for now. Other changes range from -2.3 bps (2y) to -4.7 bps (30y). The dollar receives a little blow. EUR/USD surpasses recent highs/minor resistance around 1.138 and captures the 1.14 big figure. 1.1422 is the next ST resistance zone (June 2021 interim high/upper bound of the upward sloping trend channel) with 1.1495 next on the radar in case of a break. The trade-weighted greenback is moving lower to the weakest level since mid-November at 95.37. USD/JPY flirts with the 115 barrier. EUR/GBP is literally going nowhere near the well-known 0.833/4 area. Norway’s krone stands out on FX markets today. EUR/NOK again dips below 10. This happened already a few times in recent weeks though the move today is the first one showing some actual strength. Recent gains in oil prices, which surged from $70/b early December to $84 today and a constructive sentiment (European/US stocks print gains from 0.3-0.8%) certainly help the commodity-reliant currency. News Headlines
Czech inflation rose further in December by 0.4% M/M to 6.6% Y/Y, up from 6.0% in November. The figure is 1% pt above the CNB November staff projections. Even so, this time it was in line with market expectations. Rising prices related to housing and transport (gasoline) still were important drivers. The December reading almost certainly isn’t the peak of the Czech inflation cycle yet. A resumption of VAT payments on electricity and gas will come in play in January. At the same time, many firms are expected to incorporate higher costs (commodities etc) in their price lists for the new year. In this context, inflation is likely surpass 8.0%. According to Petr Kral from the CNB monetary department inflation might even touch double digit levels for a few months early this year. The reaction of the Czech koruna to the CPI release was limited. EUR/CZK stabilized in the 24.40 area after yesterday’s koruna correction.
